Aon Retirement and Investment Blog

Weekly Update - 10 September 2018

September 10, 2018

NEW INTELLECTUAL CAPITAL

Commercial Real Estate Debt Overview. An overview of commercial real estate debt, discussing how not all commercial real estate debt comes with the same risk/return trade-off and the perceived versus actual risk within these strategies.

MARKET MOVES (Week ending September 9, 2018)

Equities

Global equity markets fell over the week as trade tensions escalated and emerging market concerns continued. The US threatened to impose additional tariffs worth US$267bn on Chinese goods. Weak Chinese economic data and trouble in South Africa and Argentina were negative drivers for emerging market equities over the week. The S&P 500 Index fell by 1.0% over the week, outperforming the MSCI World Index which fell by 1.7%. On a year-to-date basis, the S&P 500 Index has outperformed the MSCI World Index (8.9% vs. 3.5%).

US Small Cap stocks underperformed Large Cap stocks over the week as the Russell 2000 index fell by 1.6% whilst the S&P 500 Index fell by 1.0%. On a year-to-date basis, the Russell 2000 Index has outperformed the S&P 500 Index (12.5% vs. 8.9%). Growth stocks underperformed Value stocks over the week as Growth stocks fell by 1.7% whilst Value stocks fell by 0.3%, as measured by MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (14.8% vs. 3.0%).

Bonds

The 10-year US treasury yield rose by 9bps to 2.94% and the 30-year US treasury yield rose by 10bps to 3.1% after the release of strong labour market data (see below). The 20-year TIPS yield rose by 7bps to 0.92% and the 20-year breakeven rose by 1bp to 2.11%.

Both the spread of the Bloomberg Barclays Capital Long Credit Index over the yield on US treasuries and the Bank of America Merrill Lynch US Corporate Index credit spread fell by 1bp each, ending the week at 164bps and 120bps respectively. The US high yield bond spread over US treasury yields fell by 1bp to 348bps and the spread of USD denominated EM debt over US treasury yields fell by 2bps to 368bps over the week.

Commodities

The S&P GSCI fell by 1.6% in USD terms over the week. The energy sector fell by 2.1% as the price of WTI Crude oil fell by 2.9% to US$68/BBL. Industrial metals fell by 1.8% as copper prices declined by 2.3% to US$5,883/MT. Agricultural prices fell by 1.4% and gold prices fell by 0.3% to US$1,199/ounce.

Currencies

The US dollar appreciated against all major currencies over the week. The US dollar appreciated by 0.4% against sterling, ending the week at $1.30/£. The US dollar appreciated by 0.4% against the euro, finishing the week at $1.16/€. The US dollar appreciated by 0.2% against the Japanese yen, ending the week at ¥111.12/$. The US dollar appreciated by 0.9% against the Canadian dollar, ending the week at C$1.32/$.

Economic Releases

US economic data continued to perform over the week with the US employment report showing a strong August nonfarm payroll growth at 201k, above market expectations of 190k and downwardly revised July reading of 147k. The unemployment rate remained at 3.9%. More notably, year-on-year average hourly earnings growth picked up from 2.7% to 2.9% in August, the largest rate of increase since June 2009. Elsewhere, the ISM Manufacturing PMI increased by 3.2 points in August to 61.3, the highest level since May 2004 and well above market expectations of 57.6. The ISM non-manufacturing PMI also picked up from 55.7 to 58.5. However, July factory orders declined 0.8% after a 0.6% increase in June as demand for transport equipment fell sharply over the month.

In Europe, Euro Area retails sales fell by 0.2% in July taking year on year growth to 1.1%, though June year on year growth was revised up by 0.3% to 1.5%. German data was also weaker as industrial production fell 1.1% in July versus market expectations of a 0.2% increase. Factory orders showed a similar trend, falling 0.9% in July versus market expectations of a 1.9% increase. The decline in factory orders was largely driven by a 3.4% fall in foreign demand as domestic orders grew 2.4%. The German trade balance showed a similar trend as it fell sharply by €5.3bn in July to a €16.5bn surplus as exports fell 0.9% whilst imports grew 2.8%. In contrast to the softer data elsewhere, Euro Area producer prices continued to accelerate, rising 4.0% in the year to July.

The Japanese economy grew at an annualized rate of 3.0% in Q2 2018, beating the initial estimate of 1.9% and forecasted growth of 2.6%. Japan’s current account surplus widened to ¥2,009.7bn in the year to July, above forecasts of ¥1,893.2bn. Labour markets slowed as labour cash earnings slowed to 1.5% in the year to July, down from the 3.6% increase in the previous month and below a forecasted increase of 2.4%. Real wages rose for the third consecutive month as it increased by 0.4% over July but slowed from a previous 2.8% increase, and below a forecasted increase of 1.1%.

The Caixin Manufacturing PMI, which is more focused on private Chinese businesses, hit a 14-month low as it fell by 0.2 points to 50.6 in August due to a slower pace of increase in new orders. Growth in the services sector also disappointed with the services PMI falling to 51.5 from 52.8; below expectations of 52.6. The consumer price index increased by 2.3% over the year to August; this inflation rate was 0.2% higher than the previous month and the consensus estimates. Exports and imports growth slowed to 9.8% and 20.0% respectively over the year to August. Imports growth beat consensus estimates of 17.7% while exports growth was marginally below forecast. This led to a narrowing of China's trade surplus to US$27.9bn, well below analyst forecasts of US$31.0bn. However, China’s trade surplus with the US rose to a record high in August at US$31.1 bn.

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